Level 48 solution cat physics donut games

Level 22 trapdoor solution beat cat physics donut games

Just sharing a bit of enlightenment which I have learnt while trying to study the way foreign exchange works :!

Main concepts

1. Money Supply in a country includes domestic currency + foreign currency reserves

2. Foreign exchange rate is determined by supply of foreign exchange intersected with demand of foreign exchange.

3. Increase in imports increases the demand for foreign exchange

4. Increase in exports increases the supply of foreign exchange

5. FDI increases the supply of foreign exchange, hence increases the money supply

6. Increase in money supply (either via domestic currency or foreign currency), results in more spending, resulting in higher domestic prices (inflation) and higher imports.

7. Higher Imports compared to exports result in BOP deficit.

8. BOP deficit needs to be paid for by selling gold or decrease in foreign exchange reserves

9. BOP surplus is used up by buying gold or increase in foreign exchange reserves

How is BOP equilibrium reached (in turn causing foreign exchange equilibrium)

Under the Gold Reserve:

If a country is importing more than exporting (BOP deficit), it would need to pay for its imports by selling its gold or reducing its foreign exchange reserves. The quantity (supply) of foreign currency reduces in the country => money supply reduces. Due to the contraction of money supply, home prices of products come down. Exports get an incentive. Due to money supply contraction, interest rates increases which increases foreign investment (inc. in capital account). Both the above above factor remove the disequilibrium.

Due to decrease in supply of foreign exchange, home currency depreciates against it.

Under Flexible Foreign Exchange System (modern):

If a country is importing more than exporting (BOP deficit),it would need to pay for its imports by selling its gold or reducing its foreign exchange reserves. The quantity (supply) of foreign exchange reduces. As a result the home currency depreciates against it. This triggers and gives a boost to exports and reduces imports. Hence the disequilibrium is removed.